2020 Marginal Field Bid Round: Preparation and Submission of Technical & Commercial Bids

On June 1^st, the Department of Petroleum Resources flagged off the 2020 Marginal Field Bid Round. The Bid process is expected to last till December 31^st 2020.  The process commenced with the launch of an online portal and registration of interested Companies.

According to Newspaper reports, over 600 companies submitted an expression of interest. By July 22^nd 2020, DPR has screened and cleared pre-qualified Companies to participate in the Data prying stage.

This involves paying applicable fees in order to gain access to confidential Field-specific Data set. The information obtained from data prying will be used to prepare technical and commercial Bid proposals.

This paper is dedicated to tackling the difficult and complex issues facing pre-qualified companies their directors, promoters, technical partners, financiers, Lawyers, proxies etc. and all other interested stakeholders participating in the on-going 2020 Bid process.

2020 Marginal Oil Field Bid Round Timeline

Importance of Technical & Commercial Bid Proposal

One thing Regulators have learnt is that there is a high attrition rate when it comes to Award of Oil & Gas Assets to Local Oil Companies. For instance, between 2000 and 2020, DPR organized four licensing rounds, including one marginal field round.

During the period, most Oil & Gas Assets awarded to Local Oil Companies failed to achieve oil production despite being in possession of License holders for more than a decade.

The reason is that most Awardees lack the technical expertise to develop such Assets. Experience has shown that there is a clear mismatch between the technical expertise of Local Oil Companies and technical know-how required to operate marginal field Assets. For example, out of the 30 marginal fields awarded in 2003, only nine are producing as of 2020.

To redress this anomaly, the latest DPR Guidelines and practice directives place emphasis on technical competence, experience and financial resources of prospective Bidders of Nigerian Oil & Gas Assets.

Unlike the 2003 Bid process, the current regulations mandate upfront Post Award strategy Plans. Regulators are looking not only at pre-qualified Companies ability to raise funds to immediately acquire an asset but further down the road as the bidder must demonstrate a strategy for developing and monetizing the Asset in the near term future.

DPR pays particular attention to the content & quality of technical and commercial bids in arriving at a decision as regards Award of Marginal Field. To submit a winning Bid, pre-qualified companies must dedicate enough time and resource in order to get it right.

Bid proposal submitted by pre-qualified Companies to DPR is in two parts, namely the technical and commercial aspects of developing Marginal Field Asset. Technical proposals dwell on the evaluation of multiple development concepts required for field optimization, work programs, engineering design and installation, etc.

On the other hand, Commercial bids are basically a study of the economic viability of the project. It is a competitive process and in order to get attention, their proposal must stand out from the competition. They can attain this objective by highlighting their background, experience, qualifications, achievement and goals.

A winning Bid must convince regulators that the pre-qualified company is ready to start immediate work. Regulators worldwide take work commitment very seriously.

For instance, Companies that currently hold Oil & Gas assets that are NOT operated in a business-like manner are disqualified from participating in the 2020 bid process.

In Indonesia; prospective bidders are expected to enter performance bonds guaranteeing the fulfilment of technical work programs as a condition for a grant. This ensures that Awardees don’t just abandon Asset thereby denying Government of Oil Tax Revenues. 

In a similar fashion, Nigerian regulators view technical proposals as a kind of commitment on the part of Bidder as to the seriousness with which they will carry out work programs in a timely and expedited manner.

Pre-qualified Companies can access Field dataset which holds Information Memoranda on the specific field they are bidding for, upon payment of following fees;

• Payment of USD $15,000.00 (Fifteen Thousand dollars) for data prying.
• Payment of USD $25,000.00 (Twenty Five Thousand dollars) for data Leasing.
• Payment of USD $25,000.00 (Twenty Five Thousand dollars) for field Specific report.

Technical Bid Proposal

Following Data prying phase, pre-qualified companies will be required to submit field-specific technical and commercial bids based on relevant field data leased from DPR.

It’s a long-standing policy of Government that holders of Oil & Gas Assets must possess technical and financial track records in Exploration & Production operations.

Participating Companies are expected to submit proposals to DPR which demonstrates technical competence of bidders. When in doubt, pre-qualified Companies should contact DPR for correct information on submission requirement, template, format, etc.

A technical bid proposal is a document detailing work activities required to fully develop an abandoned Oil field until it achieves first oil production. The proposal must cover technical specifications such as re-entry work necessary to re-start, develop and put abandoned fields into full production.

A Winning technical bid must detail the most appropriate re-entry work program for the field based on the assessment of Field Dataset. The bid proposal must be very detailed and meet recognized technical specifications.

Technical bids must also contain the proposed commencement date, project duration, projected capital expenditure, plan for recruitment & employment of Nigerian staff, the supply of local goods and services, etc.

A winning Bid must demonstrate the pre-qualified company’s commitment to protect the environment and ensure the safety of personnel during petroleum operations.

Due to the marginality of reserves, there is much uncertainty and anxieties amongst technical personnel as regards the good performance of low yield Fields. A winning Bid must detail the most appropriate extraction technology that will be deployed to work the Asset.

This is important because the commercial viability of Oil & Gas project depends on the ability to maintain crude oil production over the long haul. Projects will experience budget overruns where the operator is unable to resolve technical difficulties associated with crude extraction. 

The calling mark of a winning technical bid is the ability to demonstrate extraction technology capable of delivering oil at optimal outflow rates over a sufficient period of time to fully justify investment costs. To succeed in this regard a winning technical bid must be simple, factual, and exceptional to stand out from the competition.

Pre-qualified Companies can give their proposal further credibility by highlighting work qualifications and experience of their technical staff & partners. Pre-qualified Companies must state Oil & Gas projects supervised, managed or executed by them, their Directors, partners, staff, proxies, etc.

Another way Bidders can win over regulators is if they demonstrate a past experience where they displayed exceptional technical competence. It takes exceptional technical skill to be able to carry out successful Field workovers.

Where possible, pre-qualified Company’s their promoter, director or technical partner must reference previous fieldwork over experience.

Pre-qualified Companies must engage competent technical staff and partners that can both determine the reliability of data and prepare quality bid proposals.

Pre-qualified Companies must understand that the only way they can win over regulators is by backing up their concepts, recommendations and justifications based on well-established Industry practices and Information contained in Field dataset.

Finally, the Bid proposal will be subject to competitive evaluation with other submitted bids. Bidders will win over DPR where they can demonstrate the ability to fully undertake expeditious and efficient development of Marginal field Asset.

Commercial Bid Proposal

A second document that accompanies the technical Bid is known as the Commercial Bid Proposal.

According to DPR guidelines, the commercial proposal shall be submitted alongside technical bid which will be evaluated to assess the optimal field development concepts/plans and its economic viability.

Unlike the technical bid proposal which deals with work programs, the Commercial Bid is more like a Business strategy plan detailing how pre-qualified companies will raise funding, develop, manage and operate the Marginal Field Asset on a profitable basis.

A winning commercial bid proposal must evaluate in great details the economic viability of the entire project. The commercial bid must provide for risk assessment and mitigation strategies that can meet set business development goals. It must explain where the Company sees itself in one year, two or five years from now.

Despite their modest size, there are lots of risks and uncertainties inherent in operating a Marginal Field Asset. A winning proposal must identify and address these concerns. Some of the challenges facing operators include financial risk, operational risk, oil price risk, geological risk, Environmental Consideration and local content compliance, etc.

By its very nature, Oil Business is risky, capital intensive and involves the commitment of substantial upfront investments. Going by the experience of 2003 Awardees, the critical factor for Successful startup of crude oil production was the ability to secure financing.

The eleven revoked 2003 Awardees lost their license primarily because they failed to raise adequate funding for development of Asset. To make matters worse few Local or International Banks are willing to lend monies to small Companies perceived as risky.

A winning Bid must demonstrate to the satisfaction of regulators, the capacity to raise funding required for fully developing Assets. Funding options available to Marginal field License holders include Debt & Equity financing, third party financing, raising monies from capital markets, commodity houses, International Finance Institutions, etc.

There are several factors considered by financiers of oil and gas project before they make firm investment commitments.

A winning bid must consider variables such as fiscal & tax incentives, size of recoverable reserves, oil price, well performance, projected outflow, etc. that go into NPV and ROI calculations.

The way and manner commercial bids are prepared will give regulators an insight into the financial competence of pre-qualified companies. Where in doubt, study and reference the experience of 2003 Awardees and indigenous companies that acquired divestment assets (2010 – 2015).  

Another key issue that must be considered in a winning proposal is demonstrating an ability to manage operational risk. For instance Bidders, their promoters, directors and technical partners can reference a past experience where their managerial competence ensured that an oil and gas project was delivered on cost and schedule.

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It is a well-known fact that Oil Business often involves engaging services of third-party service providers. Delays or poor performance by third-party service providers may affect the commercial viability of projects.

One way of demonstrating operational competence is by citing previous experience inability to handle the performance of obligations by third-party service providers.

Pre-qualified companies must have in place proper internal controls and structures such as Company Management Systems (Business and Health, Safety & Environment (HSE) principles, recruitment and training policy, business controls).

The most capable companies are ones that possess good corporate Governance. This will help avoid contentious issues that can lead to partnership litigation disputes which are a major reason for the high failure rate amongst 2003 Awardees.

Good Corporate Governance is also necessary for securing quick financing and helps overcome operational challenges. Corporate Governance issues must be addressed in a winning Bid.

The whole essence of the Marginal Field Program is to develop local capacity in operation of low yield fields. In this regard, a winning bid must detail in house synergy for acquiring oil field management know-how and technology transfer arising from the joint collaboration with foreign technical partners.

Marginal field operations are small scale operations with low operational costs and beak even margins. Investments in marginal fields are low capital commitments with short payback durations. To thrive, Operators of marginal fields must grow their production and development capabilities at scale in order to create substantial value.

Pre-qualified companies need to demonstrate an ability to rein in the capital and operational costs. Winning Bids must demonstrate an ability to manage financial exposure.

At inception, License-holders are basically small companies with little or no track record in petroleum operations lacking physical structures on the ground. In practice, they end up relying on technology partners to run the entire petroleum operations.

Pre-qualified Companies must detail all the variables that go into their decision-making process when it comes to choosing technical partners. They must detail the due diligence verification process carried out on prospective technical partnership.

A winning Bid must demonstrate that both local owned Company and its technical partners are clear on the certainty of terms, roles, responsibility and liability as well as what the technical partner brings to the table.

A winning commercial bid must address oil price risk. Oil Price fluctuation is a key variable that may determine the economic viability of Oil & Gas projects.

The value of an oil and gas asset is not only based on the size of recoverable reserves but also on the International crude oil price. Where the price falls below forecast rates it could have a devastating effect on the profitability of the entire project.

To mitigate this risk, a winning bid must demonstrate contingency plans for hedging arrangement to curtail any unforeseen impact that may arise from adverse exposure to price risk.        

Other Considerations

Marginal Field License Holders are expected to adhere to Local Content Policies in terms of commitment to training and growth of indigenous capability, manpower and local input in provision of goods and services.

To this end, a winning bid must include a comprehensive strategy for training and growth of indigenous capability and manpower.

Another important consideration which a winning Bid must contain is how to engage with host communities. Regulators mandate that host Community engagement Plans shall form an integral part of marginal field development and operations strategy.

Petroleum Operators need to interface with host communities by devising mutually beneficial engagement programs. This involves making investments in community welfare projects such as road construction, youth employment opportunities, electricity installation projects, water & healthcare projects, etc.

The emerging trend amongst Marginal field Owners is to set aside a fixed percentage (ranging from 3 – 5%) of their audited profit for the general welfare of host communities. The fund is used to finance socio-economic development of the populace in the host community.

Finally, pre-qualified companies must ensure that all their promoters, partners, financiers, proxies, etc. are acceptable to the Federal Government. 

At pre-qualification stage, regulators are expected to have conducted detailed due diligence on Companies, their directors, promoter, etc. to determine whether or not they owe Government or are presently operating Assets that are not being operated in a business manner.

The truth is that Regulators can disqualify any Bidder on this basis at any time during the process when new information comes to light.

Article prepared by M.I.B Hassan LL.M (Dundee) BL, the Author of Marginal Oil Fields Policy; The Law, Practice and Emerging Trends available at www.Lkseminars.com.ng